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Time of Bitcoin Banks?

Recently, Bitcoin has witnessed a rather remarkable event. A block was obtained in which the premium 12.5 BTC per block turned out to be less than the premiums for transactions 13.4 BTC. Of course, such situations occurred earlier as a result of errors, generosity, or different experiments on Blockchain, but for the first time such a situation was the result of a trend in the cost of transactions.

Perhaps Bitcoin requires banks or their counterparts?

Prehistory

In 2016, it would seem, nothing boded ills, transactions were cheap and cost $ 0.15 per transaction (50 satosh per byte). Note: in bitcoin, the transaction volume in currency is not important, and only the size of the transaction is important, so the transfer of $ 1,000,000 costs as much as $ 1-transfer. Some enthusiasts have speculated, and I also believe that the network should work without mining, when the transaction fee brings more than mining. This moment has come, but everything turned out not so rosy.

It is important that the main reason for the increase in the cost of the transaction is not the increase in the cost of Bitcion, because comparing the blocks, we see that the price per byte increased exactly in BTC, from 50 to 1250 satosh (during the period of excitement). That is, if we take a ten-fold increase in Bitcoin in $, then we get that the transaction price increased from 0.15 $ to 21.7 $. Obviously, this growth was speculative and there were those who could afford to pay such a price for the transaction. But what about those who expected to pay Bitcoin in a store or use it for micropayments? Even those who would happily switch to other crypto-currencies were trapped: at least 1 transaction is required to trade on the exchange.

Size and price of the transaction

We have long been accustomed to, working with large amounts – pay more tips. For us, it’s not strange that exchanges, banks, stores take% of the volume of transactions. Then the truth of this% is regulated by the “greed” of the organization. Bitcoin is not an organization, but a marketplace, a vibrant transaction market, and so the miners include exactly those transactions that are beneficial. But people still tend to leave more tips for large sums, so when big Bitcoin trades occur, the cost of 1 byte in Bitcoin rises sharply, which throws out all small transactions overboard.

Consider the simplest payment transaction and think about where you can save.

The minimum size is about 220 bytes. Note that if we want to pay 1000 people at the same time, then the amount of “1 payment” tends to 38 bytes, which is 5 times more profitable. It is also important to try to avoid getting money from many sources or, if possible, to combine them into one transaction. Combining 5000 Inputs = 1 MB, is a whole block, and costs about $ 50,000. The question of what to do with a store that accepts 1,000,000 payments a month and then is calculated with 100 suppliers remains open.

An interesting point is that the economy of Bitcoin transactions is closed: you want to conduct a transaction – you pay a commission in Bitcoin. Therefore, it is worthwhile to study not the cost of the transaction in $, which depends on the rate in the market, but the cost in BTC. The cost in BTC is growing, 10 times in 1 year, because the volume of transactions is increasing.

Bitcoin Scalability

The easiest way to reduce the cost of a byte in a block is to increase performance. Rumors that it is easy to scale Bitcoin and 100 ICO / Coin have already done it, remain rumors. So far, no coin has approached 1 MB blocks, so the introduction of 2-MB Litecoin / DashCoin blocks is premature and the average requirement is about 100 KB. Even Bitcoin Cash with 8 MB generates an average of 100 KB blocks.

There are 3 obvious directions to increase productivity:

Increase block size

Increase the production rate of the block

Reduce transaction size

The first two directions are closely related to each other, because the validation of 1 MB can go from one minute and more + still need time to distribute the block on the network to prevent the appearance of fork. At the moment, work is under way to speed up validation and distribution in the network, but the possible acceleration is only 2-4 times, given that Bitcoin already has 4 MB Segwit blocks.

Reduce the size of the transaction is the most promising piece. The principle of Lightning Network is to exchange debt outside the network, and fix them much less often. Unfortunately, this principle is applicable only if you constantly interact in a network with one agent. This principle has a beautiful mathematical foundation, but in practice, if you make a large number of transactions with someone, you can use similar approaches without the Lightning Network. The most successful approach will be if the cost of the transaction will tend to 0. Because even the most minimal record in blockchain is already 65 bytes, taking into account Segwit is 4-8 times more.

Help of other blockchains.

One of the solutions discussed is the use of other blockchain, the benefit of wanting to conduct ICO and sell enough tokens. In fact, the workload of Top 10 Coins <10%, that is, we can increase productivity by at least 100 times.

The main drawback is that people want to use Bitcoin, which can only be guaranteed by Bitcoin Blockchain. Exchange coin during the transaction leads to the fact that you still need to conduct transactions in the Bitcoin system. You can try to raise money in Bitcoin, as Mastercoin did, and be an independent blockchain, fixing your transactions in Bitcoin blockchain, but even here the growing transaction fee is in big trouble.

To date, Plasma offers an interesting solution with a sub-blockchain and arbitration system, but it is not without its shortcomings.

Time of Bitcoin Banks?

If we put 1 Satoshi = 1 Cent, then 1 BTC = 1 000 000 $, which in theory is not so much. Market Cap BTC = $ 21 trillion, which is much lower than the world’s need for money. But, the cost of the transaction is likely to be $ 5-100, which is very much.

Nobody likes the word “bank” in the cryptoworld, because it is associated inevitably with fiat money and draconian loans. The most interesting thing is that in the real world banks face similar scalability problems. By giving our money to the bank and using a plastic card for payments, the bank does not transfer money to another bank immediately, but issues a debt note and conducts a mutual settlement later.

This scheme perfectly scales, but to apply directly to Bitcoin, of course, we have no desire. The main problem: if a bank does not have a debit with a loan and the bank expects a collapse, then we will not get any Bitcoin from it. And this is exactly what we want to avoid, using Bitcoin. Our money must remain with us and be safely preserved.

Loan for operating expenses

In fact, we can eliminate this problem by giving the bank a portion of the money per 100-10000 $ weekly or monthly, depending on our confidence in the bank. In this scheme, it is ideal to use the Lightning Network, as all micropayments on our behalf are conducted by the bank and we only pay with the bank.

Cashing and receiving a salary

Probably, everyone should have a choice on what account to receive the salary: on bank or on personal Bitcon account. Upon receipt to your personal account, the transaction fee will be deducted. The operation “cashing” is called an operation when you withdraw from a loan given to a bank and transfer it to your account in Bitcoin. Naturally, here it is necessary to pay transaction fee, as well as when creating a loan.

Networks of banks

Naturally, the scheme will not work if the sender and the payee do not belong to the same bank or one network, because for this transaction will have to be fixed in the blockchain. Similar solutions already exist – these are international networks of banks, like Visa / Mastercard, and crypto-analogue – Ripple. Therefore, the sender and the receiver are likely to belong to the same banking network. The competition between banking networks can again improve the mechanisms of trust and reputation.

In fact, it is much more correct if this blockchain-network is provided by the state, because this is the primary basis for calculating taxes: VAT, profit tax, turnover tax. Of course, this is unlikely to happen, because Bitcoin in this case will be a supranational currency and literally an ideal offshore zone.

Subscription fee

Strangely enough, but in the Bitcoin system of banks, the money belongs to you and, in order for the system to work, you will have to pay banks for using the system. A limitation, for example, is that sellers will not accept purchases from private customers (only from banks) unless they pay high transaction costs.

In the network of banks, the most important is the reputation that some bank will be able to repay its debts to other banks, and for this of course we have to pay. Otherwise, any collapse of one bank will inevitably affect the balance of accounts of other banks.

P.S. I think that banks are not a relic of the old financial system, but also a locomotive of the new system. True, banks will have to go a long way to becoming a Bitcoin bank.

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